Good cashflow is vital. Many profitable businesses become insolvent because they need cash, not profit, to pay bills or loans. As a freelancer or contractor, it's a matter of having the cash at the right time therefore its important to get into the habit of producing cash forecasts based on best and worst case scenarios, so that you can take action quickly if problems arise.
The Financial Buffer
When planning to work as a freelancer, you will need to take into account the fact that you will no longer have paid holidays and sick leave. It' therefore important to have a financial buffer to weather periods without work and income. Use your freelancing income to build up a cash reserve fund in your company sufficient to pay you enough to cover your living expenses for at least six months.
Remember to plan for any possible future VAT or tax payments as well as other standard business expenses. IPSE has therefore created a Financial Forecast spreadsheet to help members manage the financials easier.
Terms and Conditions
You need to get the credit management basics right if you want to protect yourself from late payment. This means making credit terms clear in the original contract and credit vetting new clients.
Your terms and conditions should cover your costs, your delivery arrangements and your payment terms. For example, do you want full or part payment in advance or payment in arrears? If you are prepared to give credit – say 30 days, then say so here. Many businesses give credit to clients, but if you’re not certain that the client will pay up then you can ask for payment upfront.
You can also state your right to charge interest on late payments and to claim compensation for debt recovery costs.
You need to make your customer aware of, and agree to, your terms and conditions at the outset and give the client the opportunity to discuss any problems they may have before you submit your invoice. Make sure your terms and conditions are also sent out with the invoice once the work is complete.
If you want your cash to flow it’s important to have a good collections system in place. The first step is to raise your invoice. There are however, certain legal requirements that you need to be aware of before you do this. If you are a limited company, sole trader and/or VAT registered you are required by law to provide certain information on invoices you send to your customers.
For example, limited companies must have the full company name as it appears on the certificate of incorporation, any business name used in your business and an address where any legal documents can be delivered to you if you are using a business name.
Sole traders must have any business name being used if the name of the sole trader is not the business name. If you are registered for VAT you must also put the following information on your invoices.
- A unique and sequential identifying invoice number
- Your customer's name and address
- Your VAT registration number
- Date of supply to the customer
- A description sufficient to identify the supply of goods or services
- The quantity of the goods or services with a unit price - excluding VAT
- Name and address of your business
- The rate of VAT per item
- Amount owed without VAT added
Set your invoices out clearly, stating the invoice date, account number, amount due and the date by which payment must be made and preferred method of payment.